Asset Location: Why Where You Hold Investments Can Matter

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Building an investment portfolio involves more than deciding how much to allocate to stocks, bonds, and other investments. For investors with substantial assets across taxable brokerage accounts, traditional IRAs, Roth IRAs, 401(k)s, and other retirement accounts, another decision can have a meaningful impact on long-term results:

Where should each investment be held?

This is known as asset location.

Asset allocation determines what you own and how your portfolio is divided among different types of investments. Asset location determines which accounts hold those investments.

For high-net-worth investors, the distinction can be important. Two portfolios can own essentially the same investments and have the same overall asset allocation, yet potentially produce different after-tax outcomes depending on how those investments are distributed among taxable, tax-deferred, and tax-free accounts.

At Di Bello Financial, we believe investment management and tax planning should therefore be considered together.

Asset allocation is the process of determining an appropriate mix of investments based on factors such as risk tolerance, investment objectives, liquidity needs, and time horizon.

For example, an investor might have an overall portfolio consisting of equities, fixed income, cash, and other investments.

The SEC similarly describes asset allocation as dividing investments among asset categories such as stocks, bonds, and cash, with the appropriate mix depending in part on an investor's time horizon and risk tolerance.

But an investor with multiple account types has another decision to make.

Suppose a household has:

• A taxable brokerage account
• A traditional IRA
• A Roth IRA
• A 401(k)
• A trust account

It may not be optimal to simply duplicate the same investment allocation inside every account.

Instead, we can view all of those accounts as components of one coordinated household portfolio.

The objective is to establish an appropriate overall investment allocation first and then consider whether particular investments can be located among the available accounts in a way that improves tax efficiency without compromising investment objectives, diversification, liquidity, or risk management.

Different accounts receive very different tax treatment.

In a taxable brokerage account, interest, dividends, realized capital gains, and investment-fund distributions may create current tax consequences.

Long-term capital gains and qualified dividends can receive preferential federal tax treatment compared with ordinary income, while unrealized appreciation generally isn't taxed merely because an investment increases in value.

Taxable accounts can also provide opportunities for tax-loss harvesting, selective realization of gains, charitable gifting of appreciated securities, and potentially a step-up in basis under applicable estate-tax rules.

These characteristics can make taxable accounts particularly valuable from a tax-planning perspective.

Traditional IRAs, 401(k)s, and similar retirement accounts generally allow investments to compound without current taxation inside the account.

Taxes are generally deferred until distributions occur, at which point taxable distributions are ordinarily treated as income under the rules applicable at that time.

The SEC notes that tax-advantaged retirement accounts can provide tax-deferred growth, meaning taxes may not be imposed until withdrawal.

That tax deferral can make these accounts useful locations for investments that otherwise generate significant current taxable income.

But tax deferral isn't the same as tax elimination. Future withdrawals, required distributions, the investor's expected future tax rate, and estate-planning objectives all need to be considered.

Roth accounts present a different opportunity.

Subject to applicable requirements, qualified Roth distributions can be tax-free. That can make Roth assets particularly valuable for long-term compounding.

For some investors, that raises an important portfolio-construction question:

Which investments should receive the limited space available inside a Roth account?

Automatically putting the same investments in the Roth that are held everywhere else may overlook the Roth's unique tax characteristics.

Asset location becomes particularly relevant because different investments can generate very different types of taxable income.

Consider several examples.

Individual stocks can be relatively tax-efficient when held in taxable accounts, particularly when much of the return comes from long-term appreciation rather than current income.

Direct ownership can also provide control over when a gain or loss is realized.

That flexibility matters.

An investor may be able to defer realizing a gain, harvest a loss in another security, donate appreciated shares to charity, or coordinate a sale with other tax events.

This is one reason we frequently use individual securities in client portfolios: direct ownership can provide greater control over the tax consequences of investment decisions.

Interest from corporate bonds and many other fixed-income securities is generally taxable as ordinary income.

For an investor in a relatively high marginal tax bracket, holding substantial taxable fixed income in a taxable account can therefore create meaningful annual tax drag.

Depending on the investor's circumstances and available account capacity, tax-deferred accounts may sometimes be an attractive location for these investments.

But the answer isn't automatic.

Liquidity requirements, interest rates, required minimum distributions, future tax rates, and the investor's overall portfolio all need to be considered.

Municipal bonds illustrate why asset location requires more than a simple rule such as "put bonds in retirement accounts."

Interest from qualifying municipal bonds can receive favorable federal—and sometimes state—income-tax treatment.

Holding a tax-exempt municipal bond inside a tax-deferred retirement account can therefore sacrifice one of the investment's principal tax advantages.

For investors in higher tax brackets, we may instead compare the after-tax yield available from taxable bonds with the yield available from municipal securities when deciding both what bond to own and where to own it.

Certain investments can distribute significant taxable income.

Depending on the investor's circumstances, placing some income-producing investments in tax-advantaged accounts may reduce current tax drag.

Again, however, tax efficiency is only one consideration. Portfolio construction should not be distorted simply to achieve a theoretical tax benefit.

ETFs can often provide useful diversification and may offer tax-efficient implementation in certain asset classes.

But investors should not assume that every fund is equally tax-efficient.

The SEC notes that investors holding funds in taxable accounts may owe taxes on distributions of capital gains, interest, and dividends—even when those distributions are reinvested.

That is one reason the structure and location of investment funds deserve consideration as part of the broader portfolio.

A common portfolio-management approach is to give each account essentially the same allocation.

For example, every account might hold the same stock ETF, bond ETF, and international fund in approximately the same percentages.

That is operationally simple.

But simplicity doesn't necessarily produce the best result for every investor.

We generally prefer to evaluate the household portfolio collectively.

One account might hold more of the portfolio's individual equities. Another might hold a larger share of taxable fixed income. Municipal bonds might be concentrated in taxable accounts when appropriate. A Roth account may be positioned differently because of its long-term tax characteristics.

When the accounts are combined, however, the investor still has the intended overall asset allocation and risk profile.

This is an important distinction.

Asset location should support asset allocation—not replace it.

Roth assets can be among the most valuable dollars in an investor's portfolio because qualified withdrawals can potentially escape future income taxation.

That creates a temptation to simply put the most aggressive investments available into every Roth account.

We don't believe the decision should be that simplistic.

Expected return matters, but so do:

• Risk tolerance
• Time horizon
• Withdrawal expectations
• Estate objectives
• Concentration risk
• Overall household allocation
• Potential future tax rates
• The investor's need for liquidity

A Roth account belonging to an investor who expects to leave those assets untouched for decades may warrant a different investment strategy from the Roth account of someone who expects to draw on it relatively soon.

The tax characteristics of the account are important, but they don't override prudent portfolio construction.

For an investor with a single retirement account, asset-location opportunities may be limited.

For a high-net-worth household, the situation can be very different.

A family might simultaneously own:

• Taxable brokerage accounts
• Traditional IRAs
• Roth IRAs
• Employer retirement plans
• Trust accounts
• Individual and joint accounts
• Concentrated employer stock
• Municipal and corporate bonds
• Real estate or business interests

At that level of complexity, managing every account independently can create unintended consequences.

A household may appear diversified account by account while actually having substantial overlap across the total portfolio.

It can also result in tax-inefficient placement of investments or missed opportunities to coordinate investment decisions with broader tax planning.

This is why we believe sophisticated wealth management should increasingly be performed at the household level rather than the individual-account level.

Asset location can also affect how we rebalance portfolios.

Suppose equities appreciate significantly and the portfolio needs additional fixed-income exposure.

Selling appreciated stocks in a taxable account could create a substantial capital gain.

If the investor simultaneously owns retirement accounts, it may sometimes be possible to adjust the overall allocation through trades within those accounts rather than immediately realizing taxable gains.

The SEC notes that rebalancing can be accomplished in several ways, including selling overweighted assets, directing new purchases toward underweighted assets, or changing where new contributions are invested.

For a multi-account household, we can extend that concept across the entire portfolio.

That flexibility can make tax-aware rebalancing an important component of ongoing portfolio management.

Tax-loss harvesting is often discussed as though it were a year-end exercise.

We view it more broadly.

Market volatility can create opportunities throughout the year to realize losses that may offset realized gains, subject to applicable tax rules.

When investment management and tax planning are coordinated, portfolio decisions can be evaluated in the context of:

• Realized gains and losses
• Existing loss carryforwards
• Expected income
• Charitable contributions
• Required portfolio changes
• Concentrated positions
• Future liquidity needs

The objective isn't to avoid taxes at all costs.

It is to avoid allowing unnecessary taxes to dictate investment outcomes when better alternatives may be available.

There is an important limitation to tax-aware investing:

A tax benefit does not turn a poor investment into a good one.

Holding an unsuitable investment simply because selling it would generate a tax liability can expose an investor to far greater economic risk than the tax itself.

Likewise, placing investments into theoretically optimal accounts should never undermine diversification, liquidity, risk management, or the investor's financial plan.

The investment decision comes first.

Then we ask whether the same investment objective can be implemented more tax-efficiently.

That distinction is fundamental to our approach.

Many investors have one professional managing their portfolio and another preparing their tax return.

Both professionals may do excellent work.

The difficulty is that important decisions can occur between those two disciplines.

An investment manager might sell a highly appreciated security without understanding the client's broader tax situation.

A tax professional may identify a capital-loss opportunity after the investment decision has already been made.

A financial plan may recommend Roth conversions without considering how assets should subsequently be invested across the client's taxable, traditional, and Roth accounts.

When investment management and tax planning are integrated, these decisions can be evaluated together.

At Di Bello Financial, portfolio construction, tax planning, and financial planning are therefore not treated as isolated services.

We consider how they interact.

Investment performance matters.

But for taxable investors, the return shown on an investment statement isn't necessarily the same as the amount of wealth ultimately available to spend, reinvest, give to family, or leave to heirs.

Taxes, investment expenses, and portfolio structure all affect the investor's ultimate economic result. The SEC likewise emphasizes that investment costs reduce the amount of portfolio assets available to compound over time.

That is why we believe portfolio management should focus not simply on maximizing reported returns, but on helping clients build and preserve after-tax wealth while taking an appropriate level of investment risk.

Asset location is one of the tools that can help accomplish that objective.

There is no universal formula specifying which investments belong in which accounts.

The appropriate strategy depends on the investor.

Tax rates change. Investment opportunities change. Portfolios evolve. Retirement distributions begin. Businesses are sold. Concentrated positions are diversified. Roth conversions may become attractive. Estate-planning objectives change.

Asset location therefore isn't a one-time exercise.

It should be evaluated as part of an ongoing investment and tax-management process.

For high-net-worth investors with assets spread across multiple account types, the question should not simply be:

“What should I own?”

It should also be:

“Where should I own it?”

Answering both questions together can result in a portfolio that is not only appropriately diversified and aligned with the investor's objectives, but also designed with the investor's overall tax situation in mind.

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About the Author

Annette Di Bello, CPA/PFS, CFP® is the Founder and President of Di Bello Financial, a fee-only Registered Investment Advisor headquartered in Mission Viejo, California.

With nearly four decades of progressive experience in accounting, taxation, financial planning, and investment management, Annette helps high-net-worth individuals and families, business owners, executives, physicians, and retirees coordinate investment decisions with tax strategy and long-term financial planning.

As a Certified Public Accountant (CPA) with the Personal Financial Specialist (PFS) credential and a CERTIFIED FINANCIAL PLANNER® professional, Annette brings an integrated perspective to portfolio management, retirement planning, tax strategy, estate planning coordination, and wealth preservation.

Di Bello Financial serves clients throughout Orange County, Los Angeles County, San Diego County, and other states where permitted by law.

Important Disclosure: The investment allocations and portfolio characteristics discussed above represent approximate aggregate firm-wide exposures as of August 28, 2026 and are provided solely to illustrate Di Bello Financial’s general investment approach. They do not represent an individual client portfolio, model portfolio, composite, target allocation, performance presentation, or recommendation to buy or sell any security. Individual client portfolios may differ materially based upon each client’s investment objectives, risk tolerance, time horizon, liquidity needs, tax circumstances, account type, and other relevant considerations. Portfolio allocations, securities, and investment strategies are subject to change without notice. Tax strategies and their effectiveness depend upon individual circumstances and applicable tax law; Di Bello Financial does not guarantee any particular tax result. References to investment themes, emerging technologies, or industries are illustrative of areas the firm may research and do not constitute recommendations or assurances that such investments will be profitable. Investing involves risk, including the possible loss of principal.